Tesla Investors Brace for Tough Times in 2023

Tesla investors have endured some short-term challenges this year with the anticipation of a promising future payoff. However, it appears that the rest of 2023 might continue to pose difficulties for the company. Nonetheless, Tesla management remains steadfastly optimistic about what lies ahead.

Mixed News from Tesla Management

Deutsche Bank analyst Emmanuel Rosner recently had a meeting with Tesla management during a conference affiliated with the IAA Mobility, the Munich auto show. The discussion yielded both good and bad news.

On the downside, Rosner believes that there could be some disappointments in terms of deliveries and profit margins in the third quarter. Tesla had planned production downtime during this period, which could potentially limit deliveries. Additionally, while Tesla has benefited from declines in raw-materials costs throughout the year, these cost savings were mostly realized in the second quarter, leaving little room for further reductions.

Market Expectations and Concerns

Wall Street analysts currently anticipate third-quarter deliveries of approximately 470,000 cars, accompanied by operating profit margins around 10%. In the second quarter, Tesla sold about 466,000 vehicles and reported operating profit margins of nearly 9.6%, significantly lower than the almost 15% from the same period in 2022.

The price cuts implemented for Tesla vehicles at the beginning of 2023 have adversely impacted profit margins and raised concerns among investors. When second-quarter results were announced in July, Tesla's stock fell by almost 10% as investors weighed CEO Elon Musk's comments. Musk's remarks seemed to indicate a greater focus on prioritizing sales volume growth over profitability.

Investors brace themselves for challenging times ahead but remain hopeful that Tesla's long-term vision will deliver substantial rewards.

Tesla's Bold Strategy for Growth

Elon Musk, the mastermind behind Tesla, is taking a calculated gamble on the future of the company. While other automakers focus on selling fewer vehicles at higher price points, Musk believes that flooding the streets with more Tesla vehicles will be a winning strategy. This unique approach stems from his unwavering confidence in Tesla's autonomous-driving software, which he predicts will drive a continuous stream of subscription-based sales across the entire fleet.

But autonomous driving is not the only area where Tesla plans to expand. According to an expert report by Rosner, the company is also optimistic about the Cybertruck's impending launch in the fourth quarter, as well as the updated Model 3 sedan. Tesla is banking on these new features to ignite further sales growth.

The real game-changer, however, lies in Tesla's next-generation vehicle platform. Rosner highlights this as Tesla's highest priority and largest growth opportunity, potentially accounting for over 5 million vehicles produced annually worldwide. This innovative platform could potentially pave the way for a smaller, more affordable Tesla model.

Analysts predict that Tesla will deliver approximately 1.8 million cars in 2023, increasing to 2.3 million in 2024. The majority of these units will come from the Model 3 and Model Y cars, which share the same underlying vehicle platform. If Tesla can generate an additional demand of 5 million units, it would be a monumental achievement.

Despite this optimistic outlook, Rosner's report indicates that Tesla shares are currently undervalued. With a target price of $300, he rates them as a Buy. However, the average analyst rating hovers around $254. Astonishingly, only 39% of analysts who cover Tesla rate the shares as Buy, significantly lower than the average of approximately 55% for stocks in the S&P 500.

In early trading, Tesla stock experienced a minor dip of about 3.8%, settling at $246.87 per share. Meanwhile, the broader market saw modest losses, with the S&P 500 and Nasdaq Composite down 0.5% and 0.7%, respectively.